Green transformation - the pandemic's biggest beneficiary

Prof Witold Orłowski, PwC Polska's chief economic advisor, talks to the BPCC's Michael Dembinski about how Covid-19 is reshaping trends in the global economy

 

 

 

 

How concerned are you by the sharp rise in inflation, in Poland, Europe and globally? Is the Polish government prepared to use monetary policy to tackle inflation? Are there any factors in the global economy that might naturally slow down inflation, or should we get used to rising prices – and wages – for the foreseeable future?

Frankly speaking, it‘s not the hike of the headline CPI inflation to 5.5% that worries me the most.  It is clear that a big part of it is due to the global increase of oil prices. Everybody is feeling this effect, Poland as well as the UK. It is quite natural that, after the fall of the oil price to $20 per barrel in May 2020, with the global economic recovery we see it on a more normal level of $75. Once oil prices stabilise, with skilful monetary policy, the problem could disappear.

However, the problem of Poland is different. Exactly 18 months ago, just before the outbreak of the pandemic, I published a text on the economic prospects. I was pointing out several factors pushing Poland in the stagflationary direction: a gradual slowdown of the economic growth, mainly due to insufficient investment and labour shortages; and the increase of inflationary pressure, mainly due to the wage inflation and the significant increase of the electricity prices. The pandemic has frozen the problem for several quarters, but now we are facing exactly the same problems. What really worries me in the published CPI data is the rapid increase in prices of food, services, and obviously energy. Firstly, it indicates that the government policy of stimulating consumer demand and wages leads to the inflationary setback. Secondly, it shows that there is a huge price to be paid for the delay in the policy of decarbonisation. And thirdly, it makes me doubt the ability of the central bank to curb  inflationary expectations. It is not a call for the rapid hike of the interest rates. But the central bank must be clear in its communication with business and consumers.  Its role is to fight inflation and nobody should have any doubt about it.

The pandemic seems to be becoming a long-term feature of the global economy, with successive waves, waning in deadliness but still keeping hospitals busy and disrupting business. Governments, firms and citizens all seem to be adjusting to the new reality, with winners and losers emerging. Which regions, countries and sectors would you pick out as salient winners or losers? How has the global supply chain reacted?

No doubt, the pandemic has changed the development paths of the global economy. After decades of the cheerful spreading-out of the value chain across the globe, multinational companies are now trying to gain more control over it. The pandemic demonstrated, sometimes painfully, that global logistics is not always working perfectly. There are growing bottlenecks and growing political and social threats to the globalisation. However, there is a more important factor to be taken into account. The global economy is changing due to the fourth industrial revolution, and the pandemic, with the increased pressure for digitalisation, has only accelerated this. Some economic models become obsolete, some others become a reality, although a few years ago this looked more like sci-fi. It is not the case that countries will be winners or losers because of the pandemic. Everybody can be a winner in the global game if only they are able to use the opportunities offered by technological change. And everybody can be a loser if they do not join the race. This is the truth about industrial revolutions. A country, sector, or firm can either go up, joining the mainstream of changes, or falls down if it doesn’t. Examples? Two hundred years ago, China was as well developed as Europe. But Europe did undergo the industrial revolution, while China decided, for political reasons, not to allow for the economic change.  As a result, after a century the Chinese productivity fell to one tenth of the European one. But China did its homework. Today almost 40% of all industrial robots installed worldwide are installed in China.

We last spoke about the effects of the pandemic on the global economy shortly after its outbreak in the spring of 2020. You talked then of a Great Realignment – and one of the beneficiaries seems to be Poland. Our members, in particular in recruitment and real estate, are reporting record levels of new inward investment enquiries from corporations from around the world looking to relocate.

Indeed, the change may lead to the realignment, and countries that can create the right economic environment may benefit a lot.  For example, the shortening of the value chain is opening up many opportunities for Poland. Poland can offer to the investors a lot of safety, the geographical and political closeness, relatively stable economic and legal environment, reasonable costs, and an excellent access to the world’s biggest market. In a nutshell, a perfect mix for the multinational company trying to enhance control over its value chain. However, one should be careful – Poland is not the only country that can offer all this. First of all, one should remember that this company can build a factory in Poland, but also domestically, operated by robots. A business service centre operated by computers using artificial intelligence can be opened everywhere as well. Tesla is building its European factory neither in Poland, nor in the Czech Republic, but at the outskirts of Berlin. So, Poland can benefit a lot. But to benefit, we must offer really excellent conditions, the right milieu, rule of law, and the appropriate economic environment.

Cultural differences have been highlighted by the pandemic; nations with a more individualist attitude are suffering worse than countries with a more collectivist culture. Poland, the UK and the US have seen around 2,000 deaths per million, whilst Far Eastern countries have seen deaths per million well below 150, regardless of whether they are authoritarian (China, Vietnam) or democratic (Taiwan, Japan, South Korea). Egregiously authoritarian regimes tend to falsify death tolls, but even so, the biggest contrast in terms of the pandemic’s effect seems to lie between cultures where the individual has primacy, and those that prize collective behaviour more. How will this play out in the recovery?

Frankly speaking, I do not know the answer. And I say it openly, because I do not know the answer to an even more basic question. I do not know, to what extent individualism versus social collectivism will determine the success in the global race caused by the fourth industrial revolution. China already has a bigger GDP than the US. It seems that it has just surpassed the US in the total spending on R&D. The Chinese accomplishments in the last four decades are astonishing.  But Silicon Valley, as well as Wall Street are still in America, and the most important scientific and business innovations are created there. In the previous history, the intellectual and economic freedom of individuals was simply indispensable for real success in the economic development. Can China substitute it with the perfect collaboration and planning? I do not know. But obviously, it helped a lot with the pandemic.

How has the pandemic affected the global green transformation? In what areas has it accelerated, and in what areas has it slowed? The EU’s 2021-27 financial framework has climate change, digitalisation and post-pandemic recovery at its core. To what extent will the green agenda power the recovery?

In my view, the most important effect of the pandemic is the increased social awareness of the global issues. It is a rare occasion to see, in such a dramatic form, just how interconnected the world has become. A virus spreading from one continent to another in a few hours, factories stopped because of a delay in delivery from another country thousands of kilometres away, videoconferences linking peoples in various parts of the world. And a gloomier vision of people migrating to safer places, searching for safety and a better life. I am not surprised to see that the green transformation is a clear winner of this situation.  Because the more we understand the global interconnection, the more we support the policy of fighting the climate change.

Finally – a ‘what-if’. Let’s imagine that on 1 March 2020, the World Health Organization announced a total global lockdown, with emergency services being the only exception. Governments around the world comply. The entire human population is confined to their homes for 14 days. Yes, there was hardship, thousands of deaths – but by the end of the month, the virus had been snuffed out. No more lockdowns, no new variants, no more economic turmoil. A short, sharp coordinated global response, and Covid-19 was consigned to the history books. Tens of millions of lives saved, the economy quickly back on course. This couldn’t have happened in real life. But could such a scenario be a realistic solution after a future outbreak of a deadly new virus?

Well, a good question. Obviously, not with the SARS virus… nasty, but not really deadly. But if we encounter a really deadly plague, who knows? The immediate global lockdown, grounded airplanes, banned travels, extreme epidemiological measures. Probably in the interconnected world it could be the best solution.  But, frankly speaking, I do not believe in it. If the European countries, working closely within the EU, were not able to have a joint action, and even individual US states were using their own policies, how could we imagine such a global cooperation?  But never say never.